Staff Reports
The Pre-Crisis Monetary Policy Implementation Framework
March 2017 Number 809
Revised May 2018
JEL classification: E52, E58, N10

Authors: Alexander Kroeger, John McGowan, and Asani Sarkar

This article describes the Federal Reserve’s monetary policy operating framework prior to the expansion of the Fed’s balance sheet during the financial crisis. To implement the Fed’s mandate of promoting price stability consistent with full employment, the Federal Open Market Committee (FOMC) sets a target for the overnight rate in the federal funds market, where banks trade reserve balances. In the pre-crisis framework, aggregate reserves were scarce such that relatively small changes in the level of reserves would affect rates in the fed funds market. The New York Fed’s open market trading desk (“the Desk”) forecasted demand for and supply of reserves on a daily basis, and then conducted repo operations with primary dealers to supply enough reserves to maintain the equilibrium rate close to its target. The Desk was successful in achieving this objective; the fed funds rate generally remained close to its target, and any deviations were quickly corrected. However, the pre-crisis operating procedures deployed were more complex and opaque than alternative operating frameworks, required substantial intraday overdrafts from the Fed to meet banks’ short-term payment needs, and had to be abandoned once the Fed’s balance sheet expanded in response to the financial crisis. Since the crisis, the Desk has successfully controlled the policy rate using a new framework, suggesting that effective monetary control may be achieved through a different framework.

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